Nobel Laureate Espouses Reverses

While addressing the annual conference of The BAM Alliance, a community of more than 140 independent wealth management firms, MIT Economics Professor and winner of the 1997 Nobel Prize for Economics, Robert Merton, said reverse mortgages will become a “key means” of saving for retirement.

Merton’s comments were summarized in an article titled “Robert Merton on the Promise of Reverse Mortgages and the Peril of Target-Date Funds,” written by Robert Huebscher for AdvisorPerspectives.com. If we can find ways to get more out of the assets we accumulate, Merton said, then we can enjoy greater longevity without sacrificing standard of living. For the working middle class, the largest and sometimes only major savings and the largest single asset is the house in which they live, according to Merton. Reverse mortgages are ideally suited to un-tap that store of wealth. Critically, Merton said, reverse mortgages are non-recourse loans. If the value of the house is less than the principal due at the time the owners move out, then there is no recourse. In this sense, he said, reverse mortgages are designed differently than traditional mortgage loans. Borrowers shouldn’t care about the rate of interest they will pay; their goal should be to maximize the amount of principal loaned. Moreover, it doesn’t change one’s behavior. A reverse-mortgage user stays in their house.

“This is going to become one of the key means of funding retirement in the future,” Merton said.